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PART I
THE STATE OF THE ADVICE INDUSTRY AND YOUR OPPORTUNITIES
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Introduction
When I wrote the introduction to the first edition of this book, which was published in 2007, I highlighted several trends that were emerging at the time and asked financial advisors to consider the way those trends were impacting not only their practices, but also their lives. Those trends are still emergingâbut boy, have they been affected by the events that followed about a year after the book hit store shelves. The questions I raised then seem even more important now.
The first trend I identified was the challenge to prove the value of advice, especially to the baby-boom generation (the 77 million Americans born between 1946 and 1964). In the early years of what we now recognize as the financial services industry, most baby boomers were still very young; if they had any awareness of brokers or advisors at all, they most likely concluded that such people were employed only by the very wealthy. Over time, as these boomers began accumulating significant assets, they did not seek out the service of an advisor, even though their financial situation called for one. Such professionals are only interested in the very, very richâor so the boomers believed.
You may remember those television commercials from the early 1980s, in which a couple of guys are sitting in a restaurant or at a sporting event talking, and one of them utters: âMy broker is E.F. Hutton, and E.F. Hutton says . . .â Everyone else in the immediate vicinity stops speaking; there is dead silence as people hope to get some free advice from someone wealthy enough to employ his own broker.
That was undoubtedly a compelling image, and it helped establish the notion that personalized financial advice is a service available only to a chosen few. The far larger group of moderately affluent or even sort of wealthy had to look for guidance elsewhere, and in time there was no shortage of places for them to find it. When commissions were deregulated on May Day 1975, several new companies set up shop and reached out to smaller investorsâthose who believed they didnât have enough money to garner the attention of a full-service financial advisorâand over time and with very aggressive, very imaginative, and very successful marketing, they became household names: Charles Schwab. Fidelity Investments. The Vanguard Group. These companies have shown themselves to be brilliant at delivering financial services to the broad marketplace, and each delivered value and innovation. Schwab pioneered the use of a single platform to hold securities and mutual funds from multiple companies. Fidelity became one of the largest providers of actively managed mutual funds and the worldâs largest provider of retirement plans. Vanguard attracted a substantial following by offering low-cost index (passively managed) mutual funds.
With the benefit of hindsight, itâs obvious that these firms found precisely the right moment to deliver their message. Less than a year before the May Day deregulation, Congress passed the Employee Retirement Income Security Act (ERISA), which was the governmentâs response to the bear market of 1974. Among many other innovations, the ERISA regulations established the Individual Retirement Account (IRA), which was a way for employees not covered by traditional pension plans to invest money and defer taxes on gains until they began withdrawing funds in retirement.
That groundbreaking legislation would trigger a seismic shift in the way Americans began thinking about saving and investingâespecially as it was followed just a few years later by the establishment of the 401(k) plan. For a number of reasons, workers stopped looking to their employer to fund their retirement and took that responsibility on themselves. Numbers tell the story: In 1980, 60 percent of Americans were covered by a traditional pension plan; by 2006, that figure had fallen to just 8 percent. Some 70 percent of workers were enrolled in a 401(k) plan, and 22 percent were covered by a combination of defined-benefit and defined-contribution plans. Thatâs a remarkable shift in just 30 years!
Perhaps because of their Depression-era childhoods, relatively few members of the so-called Silent Generationâthat is, the baby boomersâ parentsâhad invested in the stock market, but an overwhelming majority of their children were regular investors and some managed to accumulate significant wealth, often through a company-sponsored 401(k). Yet most of them had never consulted a full-service financial advisor, because they still clung to the outdated image of personalized service as something accessible only to the very wealthyâan image that should have served as a warning sign to the wirehouses even before the economic catastrophe of 2008. And with the advent of discount brokers, many baby boomers became do-it-yourselfers, giving little or no thought to hiring a professional financial advisor.
This situation has also created a dilemma for individual advisors. Many of them have used technology in innovative ways to customize online offerings and leverage their knowledge and guidance. There are challenges to delivering personal service to a mass audience, but a number of firms have made great progress in delivering choice, service, guidance, and value.
On a smaller scale, many individual advisors opted to follow the path of constantly seeking out more and more clients. As their client base grew, the time they had to devote to each client shrunk and the quality of the relationship deterioratedâor they ended up working far more hours than theyâd ever intended. Somewhere in that mix, someone was dissatisfiedâand dissatisfaction inevitably results in change. Itâs only a matter of time.
In the earlier edition, I questioned whether the financial services industry would follow the same road as the American automobile industry (a comparison that seems a bit eerie, given the events of the past few years). When the latter industry was in its infancy, quality was of the utmost importance because, at that time, cars were considered a luxury, not a necessity. Affluent customers arenât going to accept second-rate products or services, especially if they donât believe they truly need what is being marketed to them.
There was a time when the great U.S. automakers controlled every aspect of production; the Ford Motor Company, for instance, was a substantial miner and smelter of iron ore. However, once the idea of owning a vehicle caught the publicâs imagination, the quality of many American automobiles began to slip. Automakers began using inferior materials to widen their profit margin, and by the 1960s had even embarked upon a strategy of planned obsolescenceâbuilding cars that werenât meant to last! Detroit somehow convinced itself that people would buy whatever it was sellingâgood, bad, or otherwiseâand for a time, they were right. In the industryâs golden era, demand so outstripped supply that people would wait months for a car. General Motors became the largest private-sector employer in the world and was the first public company to pay more than $1 billion a year in taxes. Many other automakers were almost as big, and the market was theirs . . . to lose. And lose it they did.
In the early 1970s, the Arab oil embargo highlighted the risks associated with Americaâs dependence on foreign oil. Service stations ran out of gas, customers had to wait in long lines for the ones that were operational, and Americans were crying out for more fuel-efficient vehicles. The automobile industry initially turned a deaf ear to the outcry and continued to produce large, expensive gas-guzzling cars loved by a declining percentage of the American auto-buying public. Meanwhile, a group of German and Japanese carmakers entered the fray, with different models with a value bent. Despite innovations and improvements in later years, Detroit never returned to the industrial prominence it enjoyed in the 1940s and 1950s. By 2009 GM was no longer the worldâs number one automakerâToyota took the crown and GM was struggling to survive.
âWhat are the lessons to be learned by full-service financial advice firms from the experiences of the automotive industry, as humbled by the boomers? And is it too late?â Those were questions I asked in 2007. If most Americans had answered the latter question in the final months of 2008 or the early months of 2009, many would have said, âStay alert! Financial services firms, like automobile manufacturers, have to focus on the end experienceâchoice, value, serviceâand never stop working to maintain trust.â
Many people of all income and asset levels saw their portfolios hit hard by the financial crisis of 2008 and the recession that followed (the effects of which are still being felt as I write this). Venerable institutions, from internationally recognized Wall Street firms to local and regional banks in cities and towns across the country, have closed their doors or merged with former rivals as a way to stay in business. The phrase âtoo big to failâ which has entered the national lexicon, was coined to describe financial institutions (and, eventually, two of the remaining Big Three automakers) that were rescued by the federal government because, it was believed, their collapse would be even more costly than the billions of dollars in taxpayer money required to keep them in operation.
The dire circumstances of what has come to be called the Great Recession have engendered a lot of understandable pessimism, but it has also underscored a trend that has been evident in every economic downturn in recent decades: Demand for financial advice goes up when the market (and the economy) goes down. In the 1990s, the longest bull market in American history, the financial planning profession enjoyed tremendous growth; even so, many of the people who made a lot of money during that decade did not engage the services of an advisor for the simple reason that they didnât think they needed one: Their portfolio was doing just fine on its own. After the Tech Wreck of 2000 and 2001 caused the market to plummet, many people finally sought out professional assistance in managing their money. It was a hard lesson, but one that proved the value of professional financial guidance.
In the pages that follow, I will attempt to help you consider the issues facing our industry and to evaluate choices as they apply to you and your practice, by helping you clarify the value you bring to clients and differentiate yourself within the crowded financial-services marketplace. Along the way, I will also suggest ways in which you can help your clients understand what exactly you can (and canât) do for them, and how you can make sure that you consistently deliver high-quality performance to each of your clientsâwithout losing yourself or ignoring your own needs and goals in the process.
The other emerging trend I highlighted in the earlier edition centers on the baby boomer market. In 2007, the oldest members of this generationâthose born in the years immediately following World War IIâbegan to reach the age at which they could take early retirement. The wealth-accumulation phase of their financial lives was drawing to a close, and the wealth-distribution phase was about to begin in earnest. The assets these people had amassed during their working years would have to see them through another 15 or 20 years, according to current life expectancy guidelines. Therein lay a challenge: These boomers had spent on average 40 years accumulating assets, and now those assets had to last on average another 20 yearsâand many of their portfolios have recently sustained heavy losses.
The advisor-client relationship will change as the clientâs life circumstances change. Is he or she prepared for that transformation? Are you? Later chapters in this book detail the issues that both of you will face and ways in which you can discuss and address them.
However, in this edition of Advisor for Life I am moving beyond the scope of the original book, which focused primarily on the baby boomers, and am including information that I hope will prove helpful as you consider the affluent within the next generation of Americans, those known as Generations X and Y. Taken together, these two groups represent some 125 million Americans, and the oldest among them will turn 45 this yearâa pivotal age at which many people finally start getting serious about saving for retirement. This market has not been a central focus of the financial services industry.
Just as the baby boomers differ dramatically from their Silent Generation parents with regard to attitudes about saving and investing, Generations X and Y are very different from baby boomers. Despite their relative youth, they tend to be much more conservative investors than the generation that precedes them and many even tend to identify themselves as savers rather than investors.
Financial security in retirement is a key concern of these younger Americans, particularly Generation X, even if retirement still seems distant for many of them. A 2008 study by the American Education Savings Council and the American Association of Retired Persons found that 70 percent of Generation X and 51 percent of Generation Y have given some thought to retirement. The figures are even higher for those who are covered by a retirement plan at work, suggesting that participation in a plan fosters long-term thinking about retirement goals. Although the study found that 21 percent of the Generation X respondents expect to retire in their 70s, compared to just 13 percent of Generation Y, most participants said they expect to retire in their 60s, just like the Baby Boomers.
However, the generations diverge when it comes to funding that retirement. Unlike the Boomers, who expected Social Security to be a primary source of retirement income, most Gen-Xers and Gen-Yers ...
